Factoring and Check Clearance Days

Lately, we’ve been running into some competing proposals from other factoring companies that advertise programs with cleverly disguised names and complex fee calculations. In their marketing materials, they claim “better than factoring” or “don’t factor.” But wait a minute— if your factoring company doesn’t want you to think they’re factoring, what do they want you to think?

If the name is purposefully misleading, it seems wise to ask what else is deceptive. Take, for example, fee calculation. If you cannot understand the fee calculation within about 30 seconds (if it’s muddled by terms like “reserve holdbacks,” “fee rebates,” “check clearance days,” “merchant contribution rates,” and “cash management rebates”), the calculation is unnecessarily complicated. I’m a graduate of one of the nation’s top business schools and have nearly 30 years of experience in the banking and finance industries, and I’m not ashamed to admit I have never heard of half those terms.

Let’s examine one particularly ambiguous term: “check clearance days.” In the world of finance, this is known as a “yield enhancement,” which is a fancy way of saying “extra income for the finance company, greater cost to the client.” What do I mean? Read on.

I examined a proposal from a company that intends to charge an applicant a daily fee for the usage of the factoring company’s funds. It seems straightforward enough; however, the factoring company has indicated “3 check clearance days.” That means that the applicant will continue paying the daily fee for 3 days AFTER the factoring company receives payment from your customer on your factored invoice. It is interesting to note that they chose not to say whether or not they mean “3 business days.” If the factoring company receives payment from your customer on a Thursday, “3 business check clearance days” would require you to continue paying the daily fee on Friday, Saturday, Sunday, Monday and Tuesday. This is how they can make the daily rate appear to be so low.

To help you understand yield enhancements, let’s take a look at the airline industry. Airlines are now charging extra if you want to check a bag or have a beverage. An advertised fare may appear low, but what the airlines aren’t telling you about is all the extra items and services that will incur extra charges. Why not just be clear in your pricing? There’s no need to be deceptive unless you have something to hide.

When selecting your factoring company, insist on pricing that’s straightforward and easy to understand. If you need a business degree to decode your factoring costs, you are likely working with the wrong company.

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